Macroeconomic Pressures Affecting Hong Kong Consumer Credit Market

The newly-released TransUnion (NYSE: TRU) Q3 2019 Industry Insights Report shows continued growth in the Hong Kong consumer credit market, but with some shifts in demand in lending products. Moreover, despite a deteriorating macroeconomic environment, delinquency levels have generally held steady over the past year.

Based on information from Oxford Economics, Hong Kong consumers face significant economic headwinds, with gross domestic product declining 3.2% in the third quarter and the unemployment rate ticking up to 2.9% in September, according to Oxford Economics. In the face of an economic slowdown, consumers appear to be increasingly leveraging credit products that provide short-term liquidity to finance their daily expenses.

Shifts in consumer credit behavior were evident in the balance trends for different products in Q3 2019. Total outstanding balances of revolving products, including credit cards, loans on cards and unsecured revolving account grew 8.5% year-over-year (YoY) in Q3 2019. In contrast, there has been a decline in the total outstanding balances of non-revolving products, with auto loans and unsecured personal loans declining 2.5% YoY and 1.7% YoY, respectively. Consumers often use revolving credit products as a source of short-term liquidity, and their growth may be an indication that consumers are using credit to finance spending.

Growing consumer demand for credit products that provide access to consumption-oriented liquidity also explained widely divergent results in originations in Q2 2019 (the latest available data for originations), as well as variations in related outstanding balances.

Origination volumes of unsecured personal loans and unsecured revolving lines grew 4.1% YoY and 6.9% YoY in Q2 2019, respectively. At the same time, balances for both account types fell YoY in Q3 2019 as average balances for new accounts dropped. Several dynamics contributed to this change: a higher share of originations for both account types were from below-prime borrowers – those with scores between DD and JJ in the TransUnion CVS risk score tiers – and lenders typically give smaller loans and credit limits to higher-risk borrowers, restricted the growth in total outstanding balance. Moreover, there is a shift in higher proportion of personal loan and revolving line originations from banks to moneylenders, as the latter specialize in lending to higher-risk borrowers. The growth in originations for unsecured personal loans and unsecured revolving lines indicates a change in consumer demand for credit.

In contrast, origination volumes dropped YoY for both credit cards and auto loans in Q2 2019, by 10.4% YoY and 19.1% YoY, respectively. The drop in auto loans originations is not surprising as auto loans in Hong Kong tend to support higher-ticket, discretionary vehicle purchases. However, the drop in card originations is more surprising given the increase in credit card outstanding balances noted above. The originations drop may be an indication that while cardholders are using their existing cards to a greater extent, they are not seeking new cards to the same extent. Hong Kong cardholders have on average 4.6 credit cards in their wallet, and the average cardholder currently utilizes only about 12% of their total credit limit. This means most Hong Kong cardholders have the capacity to increase utilization of their existing cards to finance spending, and have appeared to be doing so in Q2 2019 as consumers increasingly used their existing cards as a source of liquidity.

“The macroeconomic environment has changed significantly from one year ago. Consumer lending market pressures have been building and now include an economic downturn; increased unemployment and lower wages; and declining property values,” said Francis Lau, director of research and consulting for TransUnion Hong Kong. “The growing uncertainties are now clearly having an effect. Consumers are continuing to spend, but patterns and channels are changing and demand for credit products providing access to consumption-oriented liquidity is growing. Banks are adopting more conservative approaches, while money lenders are moving aggressively to take market share in personal loans and revolving accounts.”

Q3 2019 Metrics for Major Credit Products in Hong Kong

Source: TransUnion Hong Kong

1. Originations are viewed one quarter in arrears to account for reporting lag.
2. Serious delinquency rates are 90 or more days past due for credit cards and 60 or more days past due for all other credit products.
3. Delinquency data are reported at a balance level except for mortgages, which are reported at an account level because of the way data are collated.

Delinquencies hold steady despite headwinds

Economic downturns accompanied by rising unemployment rates typically raise the risk of increases in consumer delinquency rates. However, despite Hong Kong’s recent challenges, balance-level delinquency rates in Q3 2019 remained low and relatively unchanged across all major lending categories. The sole exception was in auto loans, which incurred a deterioration of 10 basis points (bps) YoY in delinquency. Of particular note is that personal loans and revolving lines saw an increase in originations to higher-risk borrowers over the past year. The personal loan serious delinquency rate was essentially flat, dropping only 2 bps to 0.43%, while the delinquency rate for revolving lines saw a minimal increase of 4 bps to 0.43%.

“It is gratifying to see that, despite the economic downturn, Hong Kong consumers continue to perform well on their credit obligations,” continued Lau. “The increased participation in consumer loans by higher-risk borrowers does bear watching. Lenders have supported consumers through the recent downturn, and the steady performance to date should give them reassurance that they can continue to do so. But if the downturn persists, increased diligence on portfolio monitoring will be important.”

Mortgage balances grow; may be contributing to greater consumer liquidity needs

Total mortgage balances continued to grow over the past year, despite a drop in real estate prices beginning in late 2018. According to the Hong Kong Monetary Authority (HKMA), mortgage balances grew 7.9% YoY to HKD1,415.2 billion in Q3 2019. This balance growth may be placing higher monthly debt service burdens on new mortgage holders and contributing to greater consumer liquidity needs.

New environment heightening need to identify low-risk consumers

In addition to the aforementioned consumer lending market pressures, according to the latest figures from the Census and Statistics Department, retail sales dropped 24% in October, which may put negative pressure on consumer credit demand going forward.

Changes in consumer spending patterns and the risk appetites of lenders resulting from market pressures are heightening the importance for lenders to be as accurate as possible in their evaluation of lending prospects. Lenders will need solutions that cover the complete customer acquisition cycle, helping them convert customers in a manner that balances risk and growth.

Lau concluded: “Given today’s new environment, lenders should look to enhance their customer acquisition capabilities. More generally, they will need to remain watchful for deterioration in the credit performance of their existing customers, review their risks and rewards in generating new business, and adjust their lending strategies and practices appropriately going forward.”

For more information about the TransUnion Hong Kong Industry Insights Report and to register for TransUnion's Q3 2019 Industry Insights Report webinar scheduled for Wednesday, 18 December at 3pm ET, please visit https://www.transunion.hk/business.